mortgage

2 reasons to skip homebuyer credit

3 wooden houses
Highlights
  • Prices, tax credit, low mortgage rates make now good time to buy.
  • Cost of trading up to new home is often higher than credit benefit.
  • Lack of job or income stability makes increase risk of purchase.

Have you thought of trading up to a bigger home, especially in light of the new $6,500 homebuyer tax credit? If your house is bursting at the seams with family and extra stuff, you're probably tempted to make the leap to more spacious digs.

And why not? Today's real estate prices are rock-bottom, financing rates are low and you might qualify for the tax credit.

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"This might be the cheapest time to move up, all things considered: housing prices, interest rates and the tax credit is like a cherry on top," says Carolyn Warren, a mortgage and credit expert based in Seattle, and author of "Homebuyers Beware: Who's Ripping You Off Now?"

"If a person waits a year or two, who knows where the rates will be?"

But unless you absolutely have to move because of a job relocation or another reason, some experts suggest a better idea: staying put in your crowded house.

In fact, making do with the limitations of your current home is one of the smartest ways of staying out of debt and saving money, says Deborah Knuckey, author of "Conscious Spending for Couples" and a real estate agent based in Bethesda, Md.

"I'm a Realtor and shouldn't be talking people out of buying a home," Knuckey says. "But people need to understand some of the costs associated with these kinds of moves, and how it will impact their finances for many years to come."

Following are two good reasons to skip the tax credit and not trade up to a bigger and better house.

High cost of trading up

People who trade up to more expensive homes can spend a whopping 10 percent of the value of the new home in transaction costs and taxes, not to mention moving costs, Knuckey says.

Moving from a $300,000 house to a $500,000 house will cost you $50,000, Knuckey says.

Costs and fees on the selling and buying side may include taxes, insurance, appraisals and more. Plus, there are hidden expenses most people don't think about, such as new furnishings, and higher heating and electricity bills.

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"People forget that (getting a new mortgage means) you start the clock over on a 30-year fixed mortgage," says Julie Murphy Casserly, a Chicago-based Certified Financial Planner and author of "The Emotion Behind Money."

"Many people in (their) 30s and 40s are taking out 30-year fixed mortgages (that) won't be paid off until they are in their late 60s or 70s," Casserly says.

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